India-Russia Trade Gap and Rupee Internationalisation Efforts in 2024

 What’s in today’s article?

• Why in News?
• What is Internationalisation of the rupee?
• Widening trade gap with Russia and benefits to yuan
• Challenges in exports to Russia
• Way forward

Why in News?

• New Delhi aims to enhance bilateral trade with Moscow to $100 billion by 2030 to curb its rising oil import bill and reduce dependence on the US dollar.
• However, since the Ukraine war in 2022, India-Russia trade dynamics have become skewed. Russia is now India’s top oil supplier, but Indian exports to Russia have lagged, leading to a $57 billion trade deficit out of a $66 billion bilateral trade in FY24.
• While India has saved over $10 billion by importing cheaper Russian oil and benefited from exporting petroleum products made from Urals crude, the low exports to Russia have hindered India’s goal to reduce dependence on the US dollar.
• Continued unbalanced trade might compel India to use the Chinese yuan, undermining efforts to internationalize the rupee.

What is Internationalisation of the rupee?

• About
  • Internationalisation of the rupee is a process that involves increasing use of the local currency in cross-border transactions.
  • Basically, it is a process of promoting and increasing the use of the INR as a widely accepted currency for international transactions and investments.
  • It involves enhancing the currency’s acceptance, liquidity, and usability in global markets.
• Steps taken to promote international trade settlement in rupees
  • In July 2022, the RBI provided an additional arrangement for invoicing, payment, and settlement of exports/imports in the rupee.
  • As part of this mechanism, in December 2022, India saw its first settlement of foreign trade in rupee with Russia.
  • So far banks of 19 countries including the UK, New Zealand, Germany, Malaysia, Israel, and the United Arab Emirates have been permitted to make settlements in rupees.
• How can India internationalise the rupee?
  • The FY23 Economic Survey highlights that a prerequisite for an international currency is its increasing use for trade invoicing.
  • The BIS Triennial Central Bank Survey 2022 shows the US dollar as the dominant currency, making up 88% of global forex turnover, while the rupee accounts for only 1.6%.
  • The survey suggests that if the rupee’s turnover reaches 4%—the share of non-US, non-Euro currencies in global forex turnover—it will be considered an international currency.

Widening trade gap with Russia and benefits to yuan

• China has capitalized on export opportunities in Russia amid Western sanctions and the exit of Western companies, with Chinese exports to Russia growing faster than imports of Russian oil.
• In 2023, Chinese shipments to Russia increased by 47% year-on-year to $111 billion, while imports grew by 13% to $129 billion, leading to a record two-way trade of $240 billion.
• This balanced trade has encouraged the use of domestic currencies, with 95% of China-Russia trade occurring in local currencies.
• Consequently, the yuan has become the most sought-after currency in the Russian stock market, surpassing the US dollar.
• Russian oil exports now request payments from Indian refineries in yuan, while the use of the rupee remains limited.

Challenges in exports to Russia

• The primary challenge in facilitating trade with Russia is the reluctance of private banks to engage due to fears of Western sanctions, as many have significant business interests and branches in Western countries.
  • To address this, a joint statement following Prime Minister Modi’s visit emphasized the need to increase Indian exports to Russia by strengthening industrial cooperation.
• Indian exporters are also facing difficulties using the rupee settlement mechanism while trading with Russia.
  • Exporters initially complained that although the RBI had launched the mechanism, they were unable to use it due to the absence of a Standard Operating Procedure (SOP) for banks.
• Additionally, the volatility of the ruble and rupee, unlike the more stable yuan, further complicates trade in domestic currencies.

Way forward

• During the recent visit of PM Modi, India and Russia agreed to eliminate trade barriers and initiate negotiations for a trade deal with the Russia-led Eurasian Economic Union (EEU), which includes Russia, Belarus, Kazakhstan, Kyrgyzstan, and Armenia, representing a $5 trillion economy.
• They decided to cooperate in manufacturing sectors such as transport engineering, metallurgy, and chemicals, and to implement joint projects in priority areas.
• The aim is to expand reciprocal trade flows of industrial products to increase their share in bilateral trade.
• Discussions also covered a migration and mobility partnership agreement between the two countries.

 Q.1. What is Eurasian Economic Union (EEU)?

The Eurasian Economic Union (EEU) is an economic union comprising Russia, Belarus, Kazakhstan, Armenia, and Kyrgyzstan. Established in 2015, it aims to promote free movement of goods, services, capital, and labor among member states.

Q.2. What is yuan?

The yuan is the official currency of China, symbolized as ¥ and abbreviated as CNY. It is also referred to as the renminbi (RMB) in international financial markets.

Source: The Yuan Challenge: How India-Russia trade gap may threaten rupee internationalisation efforts

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